Private equity funds have become a staple of investment in every industry sector from real estate to technology to energy to healthcare and more. The investment success of private equity funds has enabled growth in the overall economy and has been a saving grace to many private and public firms who have had difficulty in obtaining growth capital from traditional financial institutions. Some private equity funds originally based in the US have moved offshore or formed offshore parallel or feeder funds in jurisdictions like the Cayman Islands and British Virgin Islands (BVI) in order to attract foreign capital. Many foreign investors who are not U.S. citizens or U.S. resident aliens generally do not wish to invest directly in the US as doing so could cause them to be directly subject to US federal income tax (and potentially U.S. estate and gift taxes) with respect to certain of their U.S. investments. In addition, a direct (or deemed direct) investment can require compliance with certain U.S. filing obligations including the filing of U.S. federal income tax returns. The dual outcomes of direct US federal taxation and U.S. federal filing obligations can be impossible obstacles for foreign investors who would otherwise want to participate in the dynamic US economy.
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